CREDIT ANALYSIS REPORT

KENANGA INVESTMENT BANK BERHAD

Report ID 60538900356 Popularity 47 views 2 downloads 
Report Date Oct 2021 Product  
Company / Issuer Kenanga Investment Bank Bhd Sector Finance - Financial Institution
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Rationale
Rating action     
MARC has affirmed its long-term and short-term financial institution (FI) ratings of A+ and MARC-1 on Kenanga Investment Bank Berhad (Kenanga). The ratings outlook is stable.

Rationale     
Kenanga’s strong competitive position in the domestic stockbroking industry from which it has been able to generate moderate-to-strong income remains the key factor for the rating affirmation. This is supported by the investment bank’s healthy capitalisation level. The exposure of its income generation to capital market volatility is the main moderating factor.

Kenanga has sustained its market share in retail trade, which stood at 27.0% as at end-1Q2021 (2020: 26.7%). This position has been built largely on the back of a wide network of 30 branches and a sizeable remisier base of 762 individuals. Kenanga’s trading volume has also benefited from the online share trading platform co-owned with Rakuten Securities, Inc., Japan’s second-largest online brokerage firm. The trading platform has continued to gain traction with the total number of accounts increasing to 197,022 as at end-1Q2021, generating trading value of RM14.7 billion (2020: 165,799 accounts; RM44.9 billion) and contributing about 20% of Kenanga’s trading value in 2021.

Apart from stockbroking fees from trading activities, the investment bank also generates interest income from its gross loan portfolio, which stood at RM2.0 billon as at end-1Q2021 (1Q2020: RM1.9 billion). The loan portfolio comprises share margin financing and term loans. In 2020, Kenanga recorded higher pre-tax profit of RM134.7 million (2019: RM43.0 million), boosted by the performance of its stockbroking business. The profit momentum continued in 1Q2021 as Kenanga registered pre-tax profit of RM42.7 million. The bank’s total income rose significantly to RM221.3 million in 1Q2021 (1Q2020: RM116.1 million) on the back of a sharp increase in trading activities. Kenanga’s trading value in Bursa Malaysia Securities Berhad (Bursa Malaysia) increased to RM78.4 billion during the period (1Q2020: RM32.0 billion). In the immediate term, the bank targets to maintain a solid financial profile amid a challenging operating environment.

Kenanga’s consolidated Common Equity Tier 1 (CET1) ratio declined to 16.5% as at end-1Q2021 (1Q2020: 19.0%). The decline was attributed to the increased risk-weighted assets in market risks from higher exposure to equity investments. Its CET1 ratio, however, remains well above the minimum regulatory requirement and provides a buffer against any potential asset quality issues. In terms of funding and liquidity profile, Kenanga relies on short-term wholesale customer  deposits, with deposits from non-bank financial institutions and business enterprises collectively accounting for 33.9% of total liabilities as at end-March 2021. The high funding concentration poses some liquidity risk to the bank, although this is mitigated by sizeable liquid assets of 32.3% of total assets. Liquidity coverage ratio stood at 114% in 1Q2021 (2020: 164%).

Rating outlook     
The stable outlook reflects MARC’s expectation that Kenanga will maintain its key financial metrics that are broadly in line with the rating band.

Rating trajectory

Upside scenario     
Any likelihood of an upgrade would be guided by a sustained improvement in Kenanga’s profit performance with Kenanga maintaining the performance of its other credit metrics.

Downside scenario     
The rating could be downgraded if economic and financial market disruptions place downward pressure on Kenanga’s earnings.

Key strengths
Strong market position in stockbroking
Established track record as an investment bank

Key risk
Vulnerable to capital market volatility and economic conditions


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